 The interest rate determination when economic variables are partially observableHiroshi Morita and Tatsuyoshi Okimoto Journal of International Financial Markets, Institutions and Money, 2021, vol. 72, issue C Abstract: While recent studies based on factor models with no-arbitrage restrictions provide evidence of a positive correlation between the nominal interest rates and real activity, there are few dynamic general equilibrium models which can successfully explain this positive relationship. This paper provides a dynamic general equilibrium model that naturally generates a positive correlation between the nominal interest rates and excess consumption. To this end, we focus on the partial observability of economic variables in a pure exchange economy and derive a closed form solution for two-factor affine term structure model. Our empirical analysis based on the results indeed indicates the positive correlation between the nominal interest rates and excess consumption. Moreover, the time series of the model-implied nominal yield captures many of the short- and long-run fluctuations in the actual data. Keywords: Term structures; Incomplete information; Dynamic general equilibrium; Exchange economy; Kalman filter (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:72:y:2021:i:c:s1042443121000421 DOI: 10.1016/j.intfin.2021.101323 Access Statistics for this article Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely More articles in Journal of International Financial Markets, Institutions and Money from Elsevier |
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